Is Personal Finance Really 80% Behavior and 20% Head Knowledge?

October 26, 2007

Dave Ramsey is notorious for saying that personal finance is 80% behavior and 20% head knowledge. It’s a neat little soundbite but does it make any sense?

I wonder how he came up with it? I was thinking it was 70% behavior and 30% head knowledge. Or, maybe it’s 40% behavior and 60% head knowledge? I joke, I joke. But, I’m curious to know if any of you Dave Ramsey fans know how Dave came up with this little tidbit. If you know, please share.

Perhaps it’s related to the 80/20 principle (also known as the Pareto Principle). According to Wikipedia:

The Pareto Principle states that, for many events, 80% of the effects comes from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. It is a common rule of thumb in business; e.g., “80% of your sales comes from 20% of your clients.”

I don’t think the Pareto Principal applies here because it doesn’t fit this scenario. Dave is saying that 100% of personal finance success is the result of 80% behavior + 20% head knowledge, while the Pereto Principal would say that 80% of personal finance success comes from 20% of something else (behavior or head knowledge).

Obviously you can have all the personal finance knowledge in the world but if you can’t control your behavior you’ll never get anywhere. So, you do have to have both ingredients. I just want to know how Dave Ramsey came up with his soundbite.

17 responses to Is Personal Finance Really 80% Behavior and 20% Head Knowledge?

  1. Personal finance is 50% math and 80% non-math.

  2. As you already mentioned, it’s a neat little sound-bite. It sounds good. Kinda like: “73% of all statistics are made up on the spot.”

    In addition, I think he is trying to make the point that people don’t need to have a lot of financial savvy to succeed in managing their finances. Given his penchant for giving out simplistic financial plans, I’d say the saying feeds right into his whole philosophy, whether it’s true or not.

    That’s not to say that he completely off. Understanding financial matters and knowing the correct course of action is great, it’s putting them into practice that is, often times, the real challenge.

  3. My friend Harry has his own 80/20 rule. It goes “X would be 80% if it did 20% more/less of y.” such as “He would be 80% hotter if I were 20% more drunk.”

    I know that wasn’t relevant, but my point? 80/20 feels like a nice ratio. I don’t think anybody’s proven its applications, but it sounds right.

  4. Dylan that rocks 🙂

  5. I think you are right in your analysis of this issue – Ramsey is notorious for trying to “dumb” down things. I am not saying he is wrong because you could have all the knowledge in the world yet still behave badly and/or make dumb decisions. He is just going for effect…

  6. I think 80% of the blog posts about Dave are written with the hopes that the writer will experience a 20% bump in his or her traffic. 😉

  7. 100% behavior and commitment to save money for the future.

  8. I’m not sure what he means by “Behavior,” if he means “discipline” then I would agree with a statement such as: “Personal finance success comes from 80% discipline and 20% knowledge of the subject matter.” As a matter of fact I would strongly agree with such a statement as discipline in the financial matters is often underestimated. What are your thoughts about this?

  9. Chris said:

    “I think 80% of the blog posts about Dave are written with the hopes that the writer will experience a 20% bump in his or her traffic.”

    No it’s not that. Ramsey posts always tend to get a lot of comments but they do nothing for my traffic.

    It’s funny how I can ALWAYS count on you to comment on every Ramsey post.

  10. JLP said:

    “It’s funny how I can ALWAYS count on you to comment on every Ramsey post.”

    Every Ramsey post? Really? A) I work for the guy and B) I’m passionate about what we do and C) I may have commented on 3-4 of your posts.

    You left off my smiley face, by the way.

  11. JLP said:

    “It’s funny how I can ALWAYS count on you to comment on every Ramsey post.”

    Every Ramsey post? Really? A) I work for the guy and B) I’m passionate about what we do and C) I may have commented on 3-4 of your posts.

    And you left off my smiley face, by the way.

  12. 80/20 comes up fairly frequently because many things follow a power law distribution. For example, 20% of the websites on the internet get 80% of the hits.

  13. The two have nothing to do with one another, but Dave’s point is you have to be disciplined. You could be someone who is a finance major with all the designations and get the same results as someone who only knows to spend less than she makes and save 10% of her pay.

    So I doubt Dave said this with any scientific backing, but he just wants folks to know that you don’t have to be a financial genius to do well, just be disciplined.

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